GOOGLE ANALYTICS

Wednesday, October 29, 2014

We
are all jubilant about the crude prices have come down to $85 and it’s expected
to come further below as per reports of the big giants of the world market. But
I find the crude prices to shoot up to $100 by December and $120 by March 2015.
Low crude prices theory is based upon that Europe, US and China are under the phase
of slow down and hence there is not much demand as compared to the
productivity.

Well these theories are good for academics but not for
intelligent animals. Low crude prices are no doubt beneficial to the Emerging
economies who are importer of crude like India. Surplus funds from low crude
prices leads to investments in progressive segments but the game is for a very
short lived phase. Many people have now thrown the question on RBI about cutting
down interest rates as crude prices are low and hence fiscal deficit is coming
down further Indian economy is entering into the proper channel of FRBM .I find
RBI has negligible position for cutting down interest rates. We must not forget
that THE collapse of the Soviet Union in 1991 had many causes but the prime
among them was the fall in the price of oil, its main export, by two-thirds in
real terms between 1980 and 1986.

Iraq, Syria, Nigeria and Libya, oil producers all, are in
turmoil as the price of Brent crude fell over 25% from $115 a barrel in mid-July
to under $85 in mid-October.

With oil at $115 a barrel, Saudi Arabia earns $360
billion in net exports a year; at $85, $270 billion. Its budget has almost
certainly gone into the red

Venezuela’s-Every dollar off the price of a barrel cuts
roughly $450m-500m off export earnings. By Deutsche Bank’s calculation, the
government needs oil at $120 a barrel to finance its spending plans—higher than
before the recent tumble.

Iran needs oil at $136 a barrel to finance its spending
plans,

Brazil wants a high oil price to attract investment to
its ultra-deep offshore (pré-sal) oil reserve

Hence
its well clear that world economy would be facing more slowdown if the prices
of crude falls to below $85 level. Now the cold war between Russia and US is
now quite visible. US is playing with crude since its increasing its production
so as replace the entire middle east by 2018 and that to save the dollar from
getting replaced as a reserve or trading currency in the coming years. It’s a threat
for which US is aggressively producing crude. China and Russia are doing internal
trades based on their own currency and avoiding dollar. Now we all know that Russia
exports crude in exchange of food items and other necessary consumption based items.
Now with the present level of crude of $85 leads a significant threat to the
economy in the long term. Moreover with winter season in Russia creates huge
market of demand for food and other consumption items. Hence Russia would find
intense difficulty.

Sovereign funds size of the Middle East and Arab world in
terms of exporting of crude has swollen to a mammoth level. This is a threat for
the US and European economy as the biggest question of funding of various
militants group is question of trillion dollars. For me this is an assumption and the best
reply for the same lies with my readers.
The most astonishing part is that Libya has started production of crude despite
of so many tension raises the eye brows of billions. Libya would somehow be pumping
40% more oil at the end of September than it had just a month earlier? Supply
rises by 810,000 bpd, led by Libya On the other hand Saudi Arabia’s
decision to boost output to protect its market share and hurt American shale
producers and see off new developments in the Arctic was also a big shocker.

Further
Russia has aggressive planning for its military and defense and the funding of
the same is dependent on the crude export at the price of $130.

We Indian
needs huge amount of storage facilities where cheap[ crude can be stored and
can be consumed later on which will also give the biggest advantage to the
Indian economy when crude prices increases in the international market where as
India could enjoy a low price particularly for the agricultural sector. We need
to plan storage facilities and develop alternative energy for the agriculture
sector so that we can get out of the clutches of the crude prices. The recent
report of the big cats of the world market that crude prices can come down to
the level of $75 has been said since in the US, the weighted average
marginal cost of crude production at the shale-dominated onshore plays is about
$73/b. Hence they are not making a loss. Further the report have been
released since they want the world market to create massive short position in
the near term and make zoom up rally in the long term something which happened to
gold during Feb-2013. Another big winner, paradoxically, will be the U.S. oil
industry. Fears that the price plunge will force cutbacks in production appear
very premature. In fact, if Congress gets its act together and lifts its
forty-year old ban on oil exports, we could actually see a spurt in production.

The
other big winner will be the U.S. consumer. Americans are already seeing the
impact at the pump, with gas prices averaging $3 a gallon. If the price of
Brent crude falls to 80 dollars a barrel, that’s the equivalent of a $600
annual rebate for every American household and a $1.8 billion daily windfall for the
world economy.

US
economy will face slowdown and Europe too but do you think that Indian markets
and economy would grow particular the ones who are dependent on export.
Moreover these developed economies knows very well that if crude prices goes up
to the level of $120 then inflation will swell and interest rates would not
come down and rupee as well as economic growth will be under intense pressure
to grow. Hence the best way to create problems for this new government and
economy is crude prices. Hence its quite easy to derail the growth plan of the present
government and bring slow down. This is why we need huge storage facility and
also intensive growth for alternative energy particularly to the solar sector.

This month's output is OPEC's highest since November 2012
when it pumped 31.06 million bpd, according to Reuters surveys. Involuntary
outages, such as in Libya, kept output below OPEC's nominal 30 million bpd
target in earlier months of the year. Iraq, like Libya, has also managed to
increase supplies despite fighting in the country. Oil output rebounded due to
higher exports from Iraq's southern terminals and increased output from fields
in Kurdistan. An advance by Islamic State fighters nearby crude wells is
an significant threat for the crude to grow.

After
reading the affects about the losers due to the falling crude prices do you think
that they will remain silent’s and will not do anything where crude will shoot
up to the level of $120. A return to sub $100/b oil also comes as oil executives
confront growing investor calls for more capital discipline to defend revenues
against ballooning oilfield service bills. Creeping industry costs and
fast-growing costs of accessing more remote, complex sources of oil and gas and
have played a key role pushing breakeven costs perilously close to current oil
prices. The London-based group said that collectively, the world’s oil
majors are looking at a potential capital spend of $548 billion over the period
2014-2025 on projects that require a market price of at least $95/b. Hence
if oil companies start losing billions then unemployment would increase which
will create massive prolonged slow down. Do you think that these exporting
economies would afford that at the cost of low crude prices?

The battle is now between US and Russia and Middle
East countries who export crude. This is further proved from the latest US air
strikes in Syria targeted oil facilities controlled by Islamic State (Isis) in
a deliberate attempt to wipe out a lucrative source of income for the rapidly
expanding jihadist group. The Islamic State, which now controls an
area of Iraq and Syria larger than the U.K., may be raising more than $2
million a day in revenue from oil sales, extortion, taxes and smuggling,
according to U.S. intelligence officials and anti-terrorism finance experts.
The Islamic State is probably the wealthiest terrorist group we’ve ever known,”
said Matthew Levitt, a former U.S. Treasury terrorism and financial
intelligence official who now are director of the counter terrorism and
intelligence program at the Washington Institute for Near East Policy.
Hence that’s the reason why crude prices are coming down but the biggest question
is that how long the price will be falling. The war for Crude is cruel and I
fear India should not get burnt. That’s the reason I am focusing and urging
more on increasing the storage facility of India for crude.

According
to the Iraq
Energy Institute, an independent, nonprofit policy organization
focused on Iraq’s energy sector, the army of radical Islamists controls
production of 30,000 barrels of oil a day in Iraq and 50,000 barrels in Syria.By
selling the oil on the black market at a discounted price of $40 per barrel
(compared to about $93 per barrel in the free market), ISIS takes in $3.2
million a day.

My
point is that why we should get into this problem and why not aggressive look
for freeing up the agri-sector from the dependency of oil and focus on solar
power.US is squeezing up Russia and Middle East so as to cut down the funding.
Now do you think that RBI will cut down interest rates and take the hit later
for rising crude prices?

We
should build huge reserves/storage of crude at these low levels and also work
hard to develop solar power energy based energy supply for agri-sector to
control the affect of rising crude prices.Also remember that what ever losses happens today will be coped up in the long term.So their is less space to smile.

Wednesday, October 15, 2014

The Indian
manufacturing segment is on the path of massive revolution where ‘Make In
India’ is being invited. In my research I find some socio economic areas where
improvement and cautious approach is required to be adopted by the Business
Chambers of Commerce and also by the Indian government and regulatory system. We are inviting FDI investments and investors
to open shops here. We are proud to invite but how much trust the business
houses like CII,FICCI, ASSOCHAM has in these initiatives. Since they have been the biggest suffers over the last 5 years in terms of policy actions. We are not criticizing
the concept or the dream but we have a long way to go and achieve the same. We are
indirectly asking FDI to create India as an exporting hub. But, how well we are prepared for an instant
flow of the FDI’s in India. We are not discussing about infrastructure growth but we are discussing about other prime socio-economic factors which will support in real terms for Make In India.

In India
we have witnessed the trend of slow project progress and high escalation cost
as we all know that certain percentage of the project goes as bribery to the
various people in the system to start the project. Bribes to the politicians
and high levels of corruptions have been the land mark of India. We have one of
the traditional processes of getting approvals for starting a business and getting
necessary approvals for the same. The new companies ACT 2013 might have been
some relief but still red tape policies take its own course of action. The
below data shows the rank of India among doing business easily in India:

Hence the above
data cleanly states that in order to Make In India successful we need to climb
down many steps down. Manufacturing segment faces the biggest problem of labour
Union and Power shortages. Last year in a research by FICCI it was found that over
the last 2 years deficit of electricity have been 15% of the peak levels which
translates into a loss of $64 billions to the economy. India has installed capacity of 250 Giga watts
but produces only 160 GW. The recent coal scam and the Supreme Court verdicts create
stupendous problems for the manufacturing base to grow in India. Its easier to
dream and think but we don’t have the basic infrastructure to support the same.
Now the biggest hurdle will begin and this Make In India would turn out to be
sour when infrastructure as well as FDI investors opens their shops simultaneously
and policy delays and setup delays creates problems for the rest. We must remember
that initially their will be some peanut investors who would come to India to
taste the waters. Once they found the water is full of salt rest of them will
stay offshore and the Dream will end up somewhere and will become a strong
point for the opposition party of BJP in the near term.

Law and
order is one of the key areas where every state should come up together to make
this Make in India initiative to be successful. We must remember that we have already
witnessed TATA NANO –Singur matter and hence efficient system and stringent
measures should be implemented so that these type of things don’t happen which
damages the scope of the Make in India to grow. One of the most important things
is that we are inviting FDI investors for opening manufacturing base in india
but where they will open their shops and what type of facilities would be
promoted by the state governments. We have 29 states in India currently and
hence we need joint effort by every state-politicians to come together to
create this Make In India. But we have found in history that every state
competes with each other due to so many regional political parties holding key
position of individual’s states. The game of bribery and manipulation starting
from land deals etc begins from these state level competitions. We need joint
effort and equivalent facilities being provided by every state and not providing
any scope of exploitation.

Now coming
to the labour reforms and policies have been totally in jeopardize over the
last 60 years. The recent case of Maruti is enough to say about my thoughts. The
Trade Unions played extensively their political game and many politicians have
come from being only an illiterate Trade Union fellow who was active in
fighting and creating problems with promoters of the company. The Indian
economy has a plethora of examples where managers/employees have been burnt to
death in the hands of the Trade Unions. We need labour laws which will not be
cheap proposition for using the labour as well as the labours would not take
things for granted. There is requirement of flexibility and every state should
understand this concept. If we look at the historic pattern of lock outs and
strikes we find impreesive numbers currently but still lot needs to be done.

India's labour laws have continued to be cited as
"archaic" or regressive and they are many –44 different laws on
labour at the central government level, often with contradictions. In my research I find that Central Government
rules and regulations have little scope to play here and much of the responsibility
of the labour laws is in the hands of State Government. Just take the example of West Bengal which
just got ruined in the hands of the trade unions over the last 3 decades in the
hands of the CPIM through these trade unions. Every business and Industry were
compelled to exit the state and get into some peaceful state. If someone says
that Gujarat, Hyderabad , Banaglore has grown phenomenally then one must remember that their
trade union policies were flexible and were well controlled. On the other hand
state government has taken some active steps to improvise the labour reforms
police which would create significant growth of these states in the long term.

There have also been cases where respective
state government has made the law more stringent, for example West Bengal. Such
states, where laws are more rigid, have done relatively poorly. The need of the
hour of this decade is that we need flexible labour laws and friendly for both
the players. We need zero politics to be mingled in these policies. We must
understand that today the citizens of India are more literate and we need to
stop think for our vote banks biased approaches. If you want India to be an exporting
hub for the global world then we need flexible, unbiased and friendly labour
policies.

Schemes
like NREAGS were all created since there was lacks of skill development and
technical education level where the huge manpower/labour could be utilized for manufacturing
base. If there were more focus towards skill developments and asking the NGO’s
that one NGO will get taxation benefits only when he is a part of Skill development
then this should have created a well sustainable labour force over the long
term. I used the NGO over here since they have more rural presence than any
other segment across India.

The government has a target of skilling more
than 500mn people by 2022, aided by the National Skills Development Corporation
(NSDC), which has been given the objective of skilling 150mn by 2022, and rest
through various ministries. Of this, 50mn is targeted in the 12th 5-year plan.
NSDC is a Public-Private Partnership (PPP) which acts as a catalyst in skill
development by providing funding at low rates(grants, equity, soft loans) to
enterprises/companies/organisations (skilling partners) that provide skill
training. The skilling programs are developed in consultation with the
industry.

Poor
basic education creates repulsive affects on the labour force which creates the
mindsets of comparisons of pay scale with others. The below data clearly
indicates the poor level of education in different segments of labours in India:

The above
data clearly shows that we need chain of actions for the skill developments and
hence we need PPP models to come active in skill development. On the other hand
its being found that always whenever there is some growth of the Indian economy
there has been a wide disparity of income between the labour force and the
capitalist. Well what I want to focus is that the pay structure of the labour
force should be compensated adequately and skill based and education/training
lead compensation should be the key parameter for labour pay in any
manufacturing base. It true that Indian labour cost is cheap but don’t make it
so cheap that trade unions gets a ground to play and some foul people become politicians
over the next 5 years.

Complicated
Trade Unions rules and regulation, leads to small attraction of manpower of
less than 10 workers/employees SME segment. SME segment is one of the fragile
sectors and hence they are the key long term economic powers but this power is
very much scared of Indian labour laws. Further complicated inspection and
various regulatory aspects create more fear and hence schemes like NREAGS comes
into play.

We
are promoting exports indirectly through Make In India. If India needs to be global manufacturing hub
then we need reforms not only on infrastructure but also in our minds sets and
approaches. We need to upgrade the skills and education levels of the manpower of
India. We need continuous supply of resources which will keep the manufacturing
alive. We need negligible biased approach of the state government and also in-depth
co-operation of making make in India to be successful. We need state governments
to come forward and look for the long term benefit of the Indian economy rather
than competing within 29 states. Remember
that India adds 12mn people to labour force every
year. Job creation statistics from the NSSO (National Sample Survey
Organisation), and cited by the BJP (party leading current Government), show
that between 2004 and 2012, India created 15mn jobs. This was much lower vs
c.60mn jobs created during FY00-05. Hence we have a long way to go and we
don’t want that Make in India goes for a wild toss. In my next article will
cover the impact of Cost Audit and Costing methods removals on the Make In
India dream.

Sunday, October 12, 2014

In continuation to my previous
research articles I have found that over the next 2 to 3 years the recession of the World Economy WILL COME BACK
AGAIN. Well today’s article might ask you to two things to do either to believe
or not believe the facts, factual and analysis. Many of my readers must be
aware that whenever there is any form of QE particularly to printing of money
into the system, a country has to pledge and balance its Gold Reserves. Now let reminded of one of the incidents of
last year’s where Germany the economy struggling with growth and employment
requested US to give back its pledged gold of 674 tons gold from the New York
Fed and the French Central Bank. Germany got only 5%of the Gold of 37 tons and
US said that they will pay back the rest over the next 8 years. This means that
US don’t have the gold which have been pledged to them and they will take 8
years to pay back the same. The below two videos are sufficient enough to disclose the rest of the story.

Now the irony of the story is that
suddenly In June 2014, however, according to a Bloomberg news report,
Germany suddenly dropped its gold repatriation request. “The Americans are
taking good care of our gold,” said Norbert Barthle, the budget spokesman for
Germany’s Christian Democratic Party. Now I request my readers to find
out the rationales behind the same action.

While doing my research I find that
Gold prices came down last year and their was a dramatic fall of the price
during H1 of 2013(calendar year). Indian government –UPA II raised the voice
that import of Gold was happening more and hence the country is facing the
problem of high fiscal deficit. The Indian government banned import of Gold and
the prices also came down. Well all these were planned by US since if the
prices came down due to demand control then for US it would be easy to buy the
Gold at low prices and build the reserves and payback the same. Further Fed
doesn’t like rising gold prices as they have a psychological impact that
undermines the value of and confidence in the dollar. Hence its well clear that for some other economy India and its political system played the game with Economy and market. Its also increased the smuggled gold market during that time.

GOLD import part in Indian import % is
very low as compared to other products particularly through the window of reverse
taxation where as individual spare parts import has taxation where as import of
the final product don’t have any such high taxation. Now just imagine the electronic
and mobile phone market which has grown in India and the import of the same.
Coal and other raw material import have been on the highest slab after the ban
of coal blocks. Now this also validates the economic data which was manipulated
by the Indian Government under the UPA-II regime in order to satisfy the US
economy.

US did naked short selling and made
double profits during H1 2013 when gold prices went for a wild toss. I would
like to give few of the examples of Naked short selling which were executed by
the US and its top players which I also covered briefly in my last year article http://www.ianalysis.co.in/2013/04/goldbillions-made.html.

H1
2013 story of Gold Price fall

A couple of short news being spread
are as follows In February, Credit Suisse ‘predicted’ that the gold market had
peaked, SocGen acclaimed the end of the gold era was upon us, and recently
Goldman Sachs told everyone to short the metal. The big father George Soros
sold down his GLD position by about 55% as of the end of 2012 and had just
600,000 shares remaining. Well this "smartest guy in the room"
locking in a profit after a 12 year bull market.

Well the gold price fall was something
beyond creativity. The following instances would make my testimony and research
very productive.

1. The gold futures markets opened in
New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes)
of gold selling of the June futures contract (see below) in what proved to be
only an opening shot.

2. Two hours later the initial selling
rumored to have been routed through Merrill Lynch's hit the market by a further
10 million ounces of selling (300 tonnes) over the following 30 minutes of
trading.

Naked short selling of gold contracts
that occurred on January 6, 2014: more than 12,000 contracts traded –
equal to more than 10% of the day’s entire volume during the 23 hour trading
period in which gold futures trade. No news to support the same. At the
same time, no other securities market (other than silver) experienced any
unusual price or volume movement. 12,000 contracts represents 1.2 million
ounces of gold, an amount that exceeds by a factor of three the total amount of
gold in Comex vaults that could be delivered to the buyers of these contracts.

Well the above points are sufficient
enough to proof the story that US is buy in buying Gold at low prices. US don’t
like China for its policy of converting and shifting its Dollar reserves to
Gold. But it can’t take any wild action with china since majority of US
manufacturing base is in China.

Now when the Gold Prices would increase
depends less of demand and supply and more on QE since if there is any QE
required in Future then price of Gold Have to increase so that valuation of the
same and equivalent amount of dollar is printed. The London Bullion Marketing Association (LBMA)
physical gold market plays a pivotal role in Gold Market. The LBMA is comprised of several large bullion
banks who make a market in physical gold. The reason behind asking India
to curb gold import is that US fears that their dollar might be replaced and
diversification of investments from dollar to Gold-this will replace dollar as
the reserve currency. Well a currency with high fiscal deficit would be risky for trade in the next 6 years from now hence every economy would try to save himself.

Further in my research and in continuation
to my previous article I find that US will replace the entire middle east from
crude protection by 2020 since by that time US deficit would create havoc
pressure on the dollar which will force many economies to stop using dollar as
the currency and in order to protect the green back crude production and trade
is the best option.So enjoy the low price of crude till then.

Wednesday, October 8, 2014

We all have been busy to figure to out why US is seeking desperately
for no more QE and hike the interest rates. US have no more buyers of its treasuries.
This is the biggest reason why US wants to get out of QE. Moreover the rate of
interest being demanded and not asked by the Treasury holders is killing the US
economic growth over the next 10 years from now. The most surprising part would
be in the coming decade that Dollar would loose the World Reserve Currency tag
line.

Countries like Iran, Russia, China and Brazil have
become increasingly concerned that the value of their T Bond holdings are being
diluted by the Fed’s massive money printing campaign. Even they have
started taking efforts to avoid Dollar as trading currency. Recently, Russia
and China signed a 30 year gas deal that supposedly does not involve
dollars for payment.

We all know that China have been the king of the US
treasuries but over the past 1 year it kept it level at the same. China’s
holdings of US Treasuries dropped to the lowest levels in two years after China
dumped $47.8 billion in paper—equal to about 3.6% of its Treasury holdings
as of November—bringing its total holdings to $1.27 trillion.

The below chart will give a clear understanding about the who are buying and who are offloading the US treasuries

Russia has also reduced its holdings and many of them will
try to add political colors for the same but the reality is that US dollar is
being abandoned. Astonishing I find that
Belgium becomes the hot country in term of increasing it US treasuries holdings.
Belgium held $188 billion of T Bonds in March 2013, $200 billion in November
2013, $257 billion in December of 2013 and $381 billion by March of 2014.

Belgium the name might have surprised but the truth is that US
is trying hard to get the Euro to live even we all know that the European
economy and its Euro-zone states are in deep trouble. Belgium don’t have the
funds in its pockets moreover they don’t have a surplus in their budget. Their
budget deficit is in the red, and their trade and current accounts are in the
same colors. US treasuries were being offloaded in large quantities and this
was creating a panic among the other investors. Hence they introduced the funds
through Belgium and showing the world that they are buying it. This is the main
reason behind winding up of the Treasury sales and using allusive jargon to
fool the economy and the world that US economy is coming out of the recession
and economic activities are improving. They even did not get buyers for the US treasuries
and hence they took the decision of gradual winding up.

The Big cats are more focused towards the dollar rather than
the high unemployment levels of 50% in some euro-zone countries. The Fed now
holds nearly $2.4 trillion T-Bonds, or about two times as many as China.

Dollar deals are getting low and this is visible form the
last year data that as on May 2013, the percentage of foreign exchange
transactions conducted in dollars was 80% and the percentage of overseas
reserves held in dollars was 60%. As countries sign more non dollar deals among
themselves and diversify their reserves, these percentages will certainly fall.
U.S Treasuries and bond buying is being executed through the large European
banks which have U.S. subsidiaries. On a consolidated basis, non-US
banks raised dollars by swapping other currencies and increasing dollar
liabilities, even as they increased dollar claims outside the United States.

The below chart depicts the US treasury holdings.

Now as there are no buyers of the Treasuries in the near
future and also the level of interest being demanded against them gives negligible
position to the US government in the near future to revive or protect the economy
from further collapse. US dollar is dumped and avoided by many economies and
this gives significant threat to the US dollar and economy as with a huge
deficit on its back it will be in a negligible position to bargain or command the
green back. This is also one of the angles of looking towards why the US is desperately
looking forward to become one of the top producers of crude replacing the
Middle East. If US are able become the top leader of crude production and
natural gases then its Dollar will remain as Trading /Reserve Currency.

This is the prime reason behind US aggressively moving ahead
towards crude production and it has no other option than to replace Middle East.
But recession will begin as US economy is still far behind recovery (well apart
from the rosy picture of US FED Head). Employment and inflation are just
opposite of what we are reading and assets bubbles are going to burst which
will lead US economy to begin recession for the world economy. 2016-2020 we will witness one of the biggest
recession and that would collapse the global economy. Well for a common man
employment is the key factor which gets affected in Recession.

Monday, October 6, 2014

During 2016-2018 the Interest
rates of US would rise and we must be prepared for the reversal of the inflow
of capital from the emerging economies like India. Currently Equity markets across
the globe are in the zone of all time highs based on QE injected steroids
followed with Zero Interest rates. We all know that what has happened when only
the words of interest rates hike was being uttered by the US FED during 2013
mid. Its QE has failed to bring growth within the macro economy of the US. We
are not taking the Dowjones and the S&P 500 company’s growth as macro
economic growth since there is a wide divergence between the economic growth and
S&P 500 companies. The main headache going forward is the burst of the
bubbles from various industries which will create a Tsunami affect on the
global equity markets. The question is why US and the global economy will be
under threat when the interest rates starts increasing. We are here to find the
answerer in simple terms. Moreover we are finding here the rationales behind
why US wants to raise interest rates despite of anticipated problems.

Current Zero Interest and QE affect on Industries…don’t be fooled.

Corporate profitability is
currently at record levels in US. Operating margins equaled 8.9% at the
end of 2013, a return to the previous peak. Big companies have taken the
opportunity to borrow in the bond markets, locking in cheap financing for years
to come. We are taking the numbers of new home sales to be positive and
showing signs of recovery of the US economy. Well that’s another fool’s
paradise of statistical numbers. A lower mortgage rate puts money into
homeowners’ pockets when they refinance their loans (mortgage origination
jumped by 39% to $1.75 trillion last year). It also encourages people to move.
Existing-home sales were 4.66m last year, according to the National Association
of Realtors.

I hope we are clear now about how
much strength this growth has in real terms. Ones interest rates starts climbing
a little every numbers will vanish. Zero rate of interest has pushed up the automobile
consumption but that’s a borrowed or refinanced. Americans took out 19.9m car
loans worth $388 billion in the first 11 months of 2012; both figures were
six-year highs. Total American car sales rose by 13.4% to 14.8m last year, the
highest total since 2007. But all these
are not stable economic growth. The are all inflated and all borrowed capital
game and no real investments. The history of the global economy has number of
cases where prolonged zero interest has been a birth of crisis. In
Thailand in the mid-1990s a property boom fuelled by cheap dollar loans ended
in devaluation and disaster. In Spain and Ireland in the early 2000s cheap
euro-denominated loans resulted in another property bubble.

Now come to the story of manufacturing
excluding financial and utilities. Margins have improved over the last four years. Margins for S&P
500 (INDEXSP:.INX) companies (ex-financials and utilities) dropped to 5.9%
during the financial crisis in 2009. Just a year and change later in the third
quarter of 2010, margins had already returned to the earlier 2Q 2007 peak of
8.3%. Margins continued to increase over the next 12 months, eventually
reaching an historical peak of 8.9% in third quarter 2011. Taxes and
interest rates have never been more favorable for the profitability of US firms.
Technology-created productivity increases and relatively low labor and commodity costs
as factors in higher corporate margins. “S&P 500 companies lowered both
cost of goods sold and selling, general & administrative expenses as a
share of revenue.

Zero Interest rates used to buy Back

Further don’t be fooled with the
corporate profit growth of US or European companies as most of them are hollow.
Low rates have given another ammunition in the hands of the US and European corporate
to allow firms to substitute debt for equity. This usually boosts earnings per
share, which makes it an attractive choice. American companies spent around
$400 billion last year buying back their own shares, the equivalent of 2.6% of
GDP. British ones spent 3.1% of GDP the same way. The trend has continued in
2013 and 14 too. By march 2013 last year , $111.6 billion of American share
buy-back programmes had been announced, a 96% increase on the same period in
the previous year. As on September 2014 over the past 12 months American
firms have bought more than $500 billion of their own shares, close to a record
amount. Now why capital investments did not happen and where the funds
of QE and Zero interest rates went is clear. The companies in the S&P 500
index bought $500 billion of their own shares in 2013, close to the high
reached in the bubble year of 2007, and eating up 33 cents of every dollar of
cashflow.

The Zero Interest rates play the
game like this: When it buys its shares
or pays a dividend, a firm is transferring cash to its owners. It does not alter
the underlying value of the firm, which is determined by its expected cash
flows and their riskiness. Instead all that happens is that the financial
instruments with a claim on those cash flows are reshuffled: the value of the
firm’s equity declines, its cash falls (or debt rises) and investors’ cash
holdings rise, all by an identical sum. In both cases, owners’ wealth is also
unaffected: those who sell shares in a buy-back end up with more cash and fewer
shares. These corporate have paid less tax since interest paid on
debt is tax-deductible, whereas interest earned on cash is taxable, by
increasing its net debt to finance buy-backs or dividends, a firm cuts its tax
bill. And of course, increasing the firm’s indebtedness makes it riskier.
This is one of the best uses of Zero Interest rates regime. The government has
failed in both terms 1) poor macroeconomic investments 2) negligible corporate tax
revenues. Buy-backs gave a superficial boost to EPS: the number
of shares falls more than the decline in profits from higher interest costs.
So don’t be fooled with the US stocks performances.

Sluggish investment despite low interest
rates, and huge share repurchases, is broadly true of all of corporate America
and this has taken a devils shape which will become active once the rate of interest
rates start increasing. History says that repurchases by firms in the open
market, the main type of buy-backs today, used to be banned. America loosened
its rules in 1982, Japan in 1994 and Germany in 1998. But the criticism seems
excessive, given how similar buy-backs are to dividends.

On the other hand the
non-financial firms in the S&P 500 index last year took great advantages of
Zero interest rates by extending the maturity of their debts. Their
books roughly balanced: buy-backs, dividends and capital investment ate up 101%
of operating cashflow. Their net debt was modest and stable relative to gross
operating profits. These are all the
reasons why US wants to increase the interest rates since it knows that real benefit
to the economy has be Zero. It wants to cut down these game and make the economy
strengthen despite of some pains in the long term. Be prepared for the fall and be wise while doing investments. Stop taking cues from the US markets to plan your vision for investments.

Another Financial Crisis is in the wings. Within
2016-2020 we will witness one of the historic Financial Crisis in the coming
days as burgling QE and Fiscal deficit followed with weak inflation. When QE
came into the streets during 2008 every economy thought that this will spook
inflation and will get the consumers back into the streets with the attitude of
borrowed living. But it failed but also damaged the scope of further QE. We
have now come to the end of QE as US is withdrawing but how much effective it
would be withdraw is a trillion dollar thought. The biggest blow would come
when the ammunition of QE will come to an end. All the QE across the
globe has suppressed long-term interest rates in order to get businesses to
refinance debt and invest consumers to refinance debt and buy houses, and the government
to refinance debt and spend. Well assets classes reacted well to the same
and the Big Giants of the Global market made billions again but now the time of
loosing is about to begin.

The below picture depicts the story of the Journey of US
FED QE and its inflows.

Remember that Emerging market countries are among the
most exposed to a reduction or reversal of financial flows given that they were
the recipients of large amounts of capital inflows during the quantitative
easing period. India has been one of the prominent receivers of the same and
also I find that the current government and its strategies by Honorable Prime
Minister Narendra Modi is well researched. His invitation for investments is to
the NRI’s and to the corporate to start developing their manufacturing base in
India. We are not asking for inflow of capital through stock market or through
the FII’s route. In the same note RBI governor is also cautious in its interest
rates policies since if their si global crisis of liquidity in the system then
interest rates reduction would act as the correct medicine during that time. Reducing
interest rates now would create bubbles and more NPA. Reversal in the inflows
would create ripple effects and on all asset classes. Well Asset
prices has swelled as current liabilities of the countries of QE has increased hence
much of the QE went into investments and safe guard the current liabilities payments.

The below picture is related to the inflow of capital of
QE into emerging economies.

Pumping of money into the system has become one of the
best mechanisms to face the problems of declining economic growth. After China
and US stimulus packages now the turns has arrived for the European economy to
pump steroids of QE into the system. ECB unveiled details of its purchases of
assets-backed securities and covered bonds, scheduled to commence from
mid-October. The biggest question among all these is that how long the QE and
Rising Debt would keep the world economy alive.
Global QE from China to US has lead Share prices tripled since the March 2009 low, as measured
by the S&P 500 index, and are now richly valued.

Inflow into Asia pacific from US QE

Now how the Financial Crisis
would begin and why QE will be coming to end.

Every economy has lowered its interest rates
and kept it at Zero over prolonged phase of time and the same is expected to be
continued over the next year also. But did this Zero interest was able to bring
inflation back into the economies. Well we all know it failed and the same
would continue. The two prime reasons behind the same is

Rising age
brackets of the population which gives threats for borrowed living

Citizens of these countries are skeptical
regarding how much the government would be able to pay the retirements and
other social payments and secondly if in the future the government withdraws any
of the policies then where they will get their retirement resources etc. This
has pushed the back the appetite of borrowed living consumption. The current
inflation levels are indicating that we are all living in the time of 1950-70.

The bulging liabilities of US is going to be biggest threat and also is the biggest rationales behind skeptical citizens outlook of US.

Currently
in US economy its being well found that over the next 10 years or less than
that interest cost would be more compared to other cost. Social Security,
Medicare, and Medicaid now command nearly two-thirds of the national budget and
rising. With a gaining population this crisis would become more larger and the
same would create more problem for the world economy to frame policies. QE failed to improvise the fisical deficit condition of economies. The biggets proof is the below chart which shows the failure:

I find
that within the next 10 years emerging economies would find shifting of funds
and production capacities in their economies from developed economies as devaluation
of currency and low cost of production would be the trigger. India is going to
be one of the key benefit er of the same.

The
reason behind Withdraw of QE

All asset classes’
prices have increased from real estate to equities creating new heights.
Pumping of funds into the system has propelled the valuation and investments
but zero benefits came to the economies. From China to US all asset classes of
these economies have created new historic highs.

The GDP
growth chart mentioned below depicts clearly the affect of QE on the economies.
Hence it has been proved that capitalist and investments of US top giants have
gained double where the economy is struggling. If we make a quick look we find
that the G-20 itself is growing at an almost respectable 3%, but when you look
at the developed world’s portion of that statistic, the picture gets much
worse. The European Union grew at 0.1% last year and is barely on target to
beat that this year. The euro area is flat to down. The United Kingdom and the
United States are at 1.7% and 2.2% respectively

Since
January 2009, the Fed has purchased about $900 billion of mortgage-backed
securities, $90 billion of agency securities, and $1.17 trillion of Treasury
securities, for a total of about $2.2 trillion. This represents about 28% of
the outstanding amount of these securities, a huge amount.

Currency War?

The next level of game which will be
played by the world leaders of these QE countries is to play with the currency.
They will try their bets to devalue the currency and Japan is clearly in the
process of weakening their currency. ECB head Mario Draghi is committed to
weakening the euro. The reigning economic philosophy has it that weakening your
currency will boost exports and thus growth. And Europe desperately needs
growth. This is the best ammunition to get growth within the economy and increase
exports which leads growth for the industry but this would impact trade
practices and would destroy the emerging economies true potentiality. The world economy would face tremendous increase in trade practices violations. India has taken the right step by asking the NRI community to come back to India and explode opportunities here since the developed economies are going to face one of the toughest days. Low cost of production economies are being searched now and the competition would increase further.

The
biggest collapse would come once the entire ocean of QE will dry up and then intricate
investments across the globe would squeeze the liquidity and all asset classes would
start the biggest fall. Over 90 percent of Japanese banks have increased loans
and investment in riskier assets in the past year.

Emerging economies growth is also going to
take a hit and hence the world economy would enter into another round of
recession by 2016-20.The above rationales are enough to prove the theory that
reversal of capital and insufficient macro –economic growth are going to be
biggest bubble. The debt market will be rattled and the currency will turn out
to be the highest volatile precut every in the history of financial products in
the coming days.

About Me

I am a economic,financial writer and research analyst. I am an Economist |Editor | Author | Columnist | Speaker|Strategist|. Digging out facts and making indepth analysis of financial matters is my life work.I love discussing and making financial strategies to meet the financial objectives of the life.At the same time I am an avid reader. Books are my passion. No matter how busy I am, I always manage to find time for reading. I also enjoy cooking good food, Hindi music & a good cup of coffee.One of my personal traits I am most proud of is being creative and artistic.

Total Pageviews

Search This Blog

VISTORS FOR THE DAY

SHARE IT

DISCLAIMER

All data and information provided on this site is for informational purposes only.The opinions expressed here represent my own .It does not provide stock tips.No person should use any data from this Blog as it belongs solely to the writer of the Blog.